Here’s some quotes issued today (October 9, 2008) by Merrill Lynch’s top economist, David Rosenberg (see full article here) :

"Desperate times require desperate actions and it is possible Ben Bernanke, despite his expertise in how to tap the entire toolbox of the central bank, hasn’t experimented enough… Perhaps the Fed should do something even more dramatic… To be sure, monetary policy isn’t the only answer.  A large-scale fiscal stimulus, a giant spending package on infrastructure, for example, would be useful to reverse the downtrend in employment and personal income…Our question is if the UK can manage to embark on this quasi-nationalization quest of its banking system, why can’t we?"

Here’s an economist in the largest U.S. brokerage, a very conservative organization, asking why we can’t nationalize banks, or pass a massive public works program.  And he wonders why not? 

The USA has been dominated by the conservative economic agenda since the landslide victory of Ronald Reagan.  At a time of stagflation (no growth yet high inflation and record high interest rates) President Reagan set forth an agenga which changed the economic direction.  Since then, the USA has been moving further and further along that agenda.  Spending on defense skyrocketed, entitlement programs were cut, industry regulations laxed (including the movement to self-regulate within industries), and taxes reduced.  For many people and politicians the objective became less about the results, and instead doing more.  Planks of that agenda have been extended for 25 years as the focus has become not on the results – but rather on operating within the parameters of that agenda.  Simply put, people believed if we did more, faster of the same things then the original would return.

But this isn’t 1980.  And circumstances are far different.  Nothing today looks like it did then.  Yet, most people are blinded by Lock-in to doing what previously worked, rather than experimenting and trying new things.  As serious as the market shift has been, and as great as the Challenges have become, people still have not Disrupted their awareness of the environmental shift.  They are trying to use the tools of the last war to fight this new war.  Lock-in is keeping them from considering other options.

It’s easy to be reminded of the economist John Keynes, a great influencer of the The New Deal policies of the 1930s.  As he proposed the greatest use of debt ever by a government, he was seriously challenged.  Leaders asked of him "won’t this debt inevitably lead, in the long-run, to runaway inflation and higher taxation that will cripple the economy?"  As he pondered the 20% national unemployment and accelerating bankruptcies he replied "in the long-run, we’re all dead."  What Dr. Keynes summed up was that beliefs, theories and assumptions weren’t terribly important.  What mattered were results.  The traditional economic approaches had led to the 1920s runaway market and resultant collapse – and what he felt the country needed was to put people back to work immediately.  He was ready to create some White Space to try something new in search of better results.

Similarly, in the 1970s Dr. Laffer proposed a different approach to economic thinking.  Creating something he called the "Laffer Curve" he said that if you cut taxes enough it would spur new investment and ecomomic recovery.  Although this had no experiential basis, he felt it was worth a try.  And President Reagan, facing the country’s problems proposed an idea that seemed heresy to most – cutting taxes by 50% or more!  He was ready to try White Space in the face of an economic Challenge rather than continue the practices which had not improved the economy during the prior 2 administations (Ford and Carter.)

It is very easy to Lock-in on something that works.  Once you see it work, you become confident it will work in the future.  You start thinking if you do enough of it, it has to work.  But markets shift.  The marginal value of doing more simply declines.  Like eating pie, the first piece is unbelievably good.  The second good, but by the fourth you’re not particularly interested any more.  While I can be enticed to do a job I don’t like for a piece of pie, after a few pieces I don’t see the value in more pie so I don’t have the same positive reaction.  And that is true of Success Formulas.  Competitors see the early results.  They mimic the behavior, and they work to surpass it.  Pretty soon, they offer not only pie, but cake and cookies and lots of competitive ideas.  The pie simply doesn’t produce the benefit it once did.  And we have to realize that it’s time to experiment and try something new.  To do things that may even seem heretical at the time – but which open the doors to potentially new results that get us back on the competitive track.